If there is one place that is synonymous with free trade zones in the Gulf region, it is Dubai. All the emirates that make up the UAE have developed zones of their own and there is an increasing number in other parts of the GCC also, but nobody has embraced the concept with the same enthusiasm as Dubai, which is home to several dozen.
Indeed, its position is so dominant that many people see the emirate as the only option, according to some observers.
“When people in the UAE mention free zones most of the time they assume it’s a Dubai thing. A lot of the time they’re not even aware that there are free zones outside Dubai,” says Jason Bowers, sales and marketing manager at Sovereign Group, which advises companies thinking of setting up in a free zone.
The scale of the Dubai zones is one reason why they dominate the business community’s mindset. They are home to tens of thousands of companies and between them they underpin much of the activity in the wider economy. For example, Jebel Ali Free Zone (Jafza), which was established in 1985, is now home to more than 7,300 businesses employing around 135,000 people.
“That’s about one in every 16 Dubai residents,” says Ibrahim Mohamed Aljanahi, deputy chief executive officer (CEO) of Jafza. “Moreover, Jebel Ali Free Zone accounts for around 40 percent of the UAE’s total foreign direct investment inflows, and approximately 50 percent of Dubai’s exports. Around 20 percent of Dubai’s GDP is generated by the free zone.”
These numbers are impressive, but by some measures Jafza is not even the largest free zone. The Dubai Multi Commodities Centre (DMCC), which was set up in 2002, says it has more than 8,500 registered companies. Others are growing fast. Malek al-Malek, CEO of Tecom Business Parks, whose portfolio includes Dubai Media City and Dubai Knowledge Village, says it hosts more than 4,500 companies, with 549 joining last year.
The advantages for companies in a free zone are clear enough. The benefits vary but typically include 100 percent foreign ownership, corporate tax holidays, no restrictions on capital repatriation, no customs duties and no employment quotas for local staff.
In return, proponents say the zones encourage inward investment, promote economic diversification and help to create business hubs that would otherwise not exist. It is these benefits that have led others to try and emulate Dubai’s success.
“Free zones are helping to diversify economies beyond their current dependence on oil and are creating local employment opportunities,” says Jamal Aziz, CEO of the Sohar Freezone in Oman. “We have created 9,000 jobs and for every job we create, we estimate that three more are created in supporting industries.”
As they have matured, the free zones themselves have also diversified. The Sohar Freezone, which is attached to the port of the same name, began in 2002 with a focus on logistics, petrochemicals and metals. However, it is now expanding its dry bulk offering so it can manage Oman’s strategic national food reserve. Atyab Investments Group and its subsidiary Oman Flour Mills are building the country’s first terminal dedicated to the import and export of wheat, rice, barley and other grains. A sugar refinery is also planned.
The process of diversifying is even more advanced in Dubai. Initially most of the free zones were aimed at specific business niches, and while some like Dubai Media City and Dubai Internet City have stuck to their original remits, in many cases the barriers have broken down.
“The idea initially was to pigeonhole industries, but over time that evolved,” says Bowers. “The main free zones now are generic.”
The motivation for this often boils down to real estate. Free zone operators are in essence a part of the property market, developing offices, warehouses and other facilities, which they need to lease out to make a return. (As the number of free zones has grown, so they have to compete more fiercely for tenants and while demand is strong for free zone space in Dubai, tenants can be picky).
“Prime office areas and buildings in free zone locations have continued to experience healthy demand and we are seeing a year-on-year increase of 5-10 percent in rental prices, and an occupancy rate of 85-90 percent,” says John Davis, CEO for MENA at Colliers International, a property consultancy. Competition between free zones usually comes down to a mix of price and location. Within the UAE, Dubai is generally the first choice for most companies so free zones in other emirates, or ones that are just setting up, have to compete on price – either in terms of rent, or registration and licensing fees. Speedy issuing of licences can also be a competitive advantage.
All of them also have to compete with non-free zones industrial parks, which have been developing their offering. Abdulla Belhoul, CEO of Dubai Industrial City, which is not classified as a free zone, says it has 620 customers, with 60 arriving in the first half of this year.
“Moreover, 12 new factories became operational in 2014 and more than 75 factories are under design or construction,” he adds.
Abu Dhabi has made some notable moves in recent years to enhance its reputation as a business hub. A potential rival to Jafza is taking shape at the Khalifa Industrial Zone Abu Dhabi (Kizad) located next to the new port. In Abu Dhabi city, there is the twofour54 media production zone and a new financial precinct is currently being established that is envisaged as a rival to the Dubai International Financial Centre.
However, despite the apparent advantages they offer, Gulf countries other than the UAE have a rather mixed track record when it comes to developing free zones.
Oman has been one of the more enthusiastic proponents. As well as the site at Sohar, it has a free zone linked to its ports at Salalah and the Public Establishment for Industrial Estates operates seven industrial precincts around the country, an IT park called Knowledge Oasis Muscat and a free trade zone at Mazyona close to the border with Yemen.
Elsewhere, the zones tend to be sparser in number. Among them is the Bahrain Logistics Zone close to Khalifa bin Salman Port and the Kuwait Free Trade Zone, which opened alongside Shuwaikh Port in 1999.
Qatar has developed the Qatar Science & Technology Park and the Qatar Financial Centre, although the latter prefers to think of itself as something other than a free zone. Saudi Arabia has nothing that can easily be categorised as a free zone, although the economic cities being promoted by the Saudi Arabian General Investment Authority (Sagia) and the industrial estates developed by the Saudi Industrial Property Authority (Modon) fulfil a similar purpose.
The success that Dubai has had with its free zones means some of these countries are likely to try and follow its lead in the years ahead. Most free zone operators expect the market to become more competitive in the future. “With the market the way it is, it is almost certain that new free zones will open,” says Aziz. “Where, when and how many I do not know.”
How quickly and effectively these new rivals will be able to compete with the more established zones also remains open to question, but it will not be an easy task.
“It has taken Dubai a long time to get to where it is and Dubai’s still improving all the time, it’s still developing,” says Bowers. “It will eventually face competition but I think it will take a long time.”
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